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One of the top-performing short-term bond funds isn't run by a big Wall Street firm or supported by a team of Ph.D.'s in finance. On the contrary, the Leader Short-Term Bond fund hails from a tiny Portland, Ore., fund shop whose founder, John Lekas, paid his way through the University of Oregon fighting forest fires and working on fishing boats and in lumber mills.

After landing a broker job at A.G. Edwards & Sons in 1986—where he once made 3,900 cold calls in 22 hours—Lekas studied the markets and worked his way up to portfolio manager at Smith Barney and eventually opened his own investment advisory. In 2005, his career took another twist when he opted to move away from individual accounts and launch a mutual fund. "After considering all the possibilities, I decided the short-term bond space offered the least risk with the most return," says Lekas, 55, a competitive tennis player who has ranked nationally in his age group.

Fund manager and competitive tennis player John Lekas likes risk, but is careful not to swing blindly.
Craig Mitchelldyer for Barron's

So far, things have gone even better than planned. The $631 million
Leader Short-Term Bond
fund (ticker: LCCMX) is up an average of 4.37% a year over the past five years. It has gained 4.97% in the past 12 months, better than 99% of its short-term peers, according to Morningstar, and at a time when many bond funds have struggled to stay in positive territory. Its trailing 12-month distribution yield, meanwhile, is around 3%.

Lekas and his co-manager, Scott Carmack, routinely survey the globe for sectors or regions that have been unduly punished. "We are opportunistic," says Lekas unapologetically. He and Carmack test their top-down ideas by funneling sectors and individual securities through a risk-return model that helps them compare assets of differing duration, volatility, and credit risk. Ultimately, the projected one-year return of a potential investment must provide at least two units of return for the calculated unit of risk.

In 2010, Lekas launched the
Leader Total Return Bond
fund (LCTRX), which ranks in the top 1% of intermediate-term bond funds for the one-year and three-year horizons. The fund, which is up 4.45% in 2013, follows a similar playbook as the short-term fund but with fewer holdings—now about 84—and longer durations. "We describe it as concentrated orange juice," says Lekas, noting that there is quite a bit of overlap between the two funds, though he'll take larger positions or opt for different capital structures in the total-return fund.

Lekas isn't against moving to cash when opportunities are few and far between. At one point in 2008, the short-term fund was 70% cash, "not because we were so smart but because we couldn't find anything to buy," says Lekas. By the end of that year, however, Lekas began moving into the financial-services sector. "Our risk model was giving us huge flashing green lights," says Lekas, noting that the projected one-year return for many financials was 12 times the risk quotient. "We put the money to work in financials because we believed ultimately the Fed wasn't going to let banks fail." The move paved the way for a 13% gain in 2009.

In 2011, Lekas began shifting some assets into European financials, believing that investors had overstated the risk of a systematic meltdown. He was also interested in floating-rate notes tied to the 10-year swap, issued by European insurers. "There are very few structures that exhibit negative duration and perform positively in a rising interest-rate environment," he says. "This is one of them." Lekas bought and still holds floating-rate notes issued by Aegon, AXA, and ING Groep when they were trading at 50 cents on the dollar. "They were trading at huge discounts because they have European names, but these are global companies that offer a lot of diversification."

The move into Europe was a little premature. "We were dead-last that year," says Lekas of the short-term fund's 1.64% decline in 2011. "But we believed the model and stayed the course." Indeed, last year the fund was up nearly 9%; Lekas attributes much of this year's strong performance to that decision.

Leader Short-Term Bond

Total Returns*

1-Yr

3-Yr

5-Yr

LCCMX

4.97%

3.24%

4.37%

Barclays Gov/Credit 1-5

-0.3%

1.55%

3.05%

% Of

Top 10 Holdings

Cusip

Portfolio**

Swiss Re

87089AAA6

1.53%

Telefonica

87938WAB9

1.42

Bank of America

06051GDY2

1.35

Telecom Italia

87927VAQ1

1.35

Annaly Mortgage

035710AB8

1.31

Aegon

B01WJ96

1.30

Icahn Enterprises

451102AH0

1.28

Fifth Third

316781AA1

1.22

General Electric

36962G3M4

1.17

Citgo Petroleum

17302XAG1

1.15

Total:

13.07%

*All returns are as of 9/5; three- and five-year returns are annualized. ** As of 8/31. Source: Leader Capital

All told, the short-term fund has nearly 200 holdings, with 70% of assets in investment-grade corporates, and 20% in short-term high-yield securities. The remaining 10% is in cash. Lekas eschews Treasuries and generally avoids government debt altogether. "Governments globally are highly leveraged, terribly managed, and produce nothing," he says. "Meanwhile, consumers and corporations have gotten their financial houses in order."

Lekas also tends to avoid emerging markets, but if the price is right he'll make exceptions. In June, he bought Venezuelan sovereign debt yielding 13.25%. "We're comfortable with that credit," he says, noting that it's a tiny position in the short-term fund but is now the largest holding in the total-return fund. "It's like buying a large oil company." Roughly 30% of the short-term fund is invested in overseas debt; if the bonds aren't denominated in U.S. dollars Lekas hedges the currency risk.

Lekas and Carmack are also finding value in mining firms, beaten down on both the equity and fixed-income side. "All the miners have been thrown out with the bath water," says Lekas. In the spring, the fund invested in
Cliffs Natural Resources CLF -4.90566037735849%Cliffs Natural Resources Inc.U.S.: NYSEUSD2.52
-0.13-4.90566037735849%
/Date(1438376631421-0500)/
Volume (Delayed 15m)
:
3686529AFTER HOURSUSD2.53
0.010.3968253968253968%
Volume (Delayed 15m)
:
154029
P/E Ratio
N/AMarket Cap
386580593.99786
Dividend Yield
23.80952380952381% Rev. per Employee
741181More quote details and news »CLFinYour ValueYour ChangeShort position
(CLF) debt, rated BBB-minus, believing that iron ore had bottomed out and that Cliffs would benefit from rising iron-ore prices. "There was extreme negativity in the sector, which gave us an opportunity," he says. "They have a strong balance sheet and had recently raised equity capital through a mandatory convertible [a convertible bond that has a required redemption feature], which we currently own in the total-return fund."

Mining? Venezuela? It sounds risky for a short-term bond fund, but Lekas says investors need to look at the portfolio in the aggregate. In addition to adhering to their risk-return model and their own fundamental analysis, the managers stick with companies that are well capitalized and leaders in their industries. They also keep the average duration of the portfolio low; it was recently just 1.4 years, roughly half that of the typical short-term bond fund. "We're willing to take on some risk," says Lekas, "but only when it pays."